From floating- to fixed-rate loans: Options for customers still on SOR-based property loans

Amid the current rising interest rate environment, banks in Singapore are receiving many enquiries from customers about their loan packages and how best to cope with the situation. 

For customers who have yet to switch out of their SOR-based property loan packages, it is now an opportune time to relook at the options available and pick a suitable one. As at end-March 2022, there remained about 5,000 customers with SOR-based retail loans. Under the roadmap drawn up by the Steering Committee for SOR & SIBOR Transition to SORA (SC-STS), an industry committee established by the Monetary Authority of Singapore (MAS) in August 2019 to support a smooth transition to SORA, customers with SOR-based retail loans have until Aug 31, 2022, to switch to a different loan package.

There are a number of options available to customers. The options are set out below to help customers pick the best one which suits their needs. Do note that the packages offered by each bank may differ. It is best to check with your bank on the options available. 

Option 1. SORA Conversion Package and other types of SORA-based loans

Similar to SOR, SORA-based loans are floating rate loans, and the interest paid by customers will change periodically depending on movements in SORA.

SORA, which has been administered and published daily by MAS since 2005, is the volume-weighted average rate of overnight, unsecured borrowing transactions between banks in the Singapore cash market. 

The three-month compounded SORA is the most commonly offered tenor setting for SORA loan packages, which is computed by taking the compounded average of daily SORA over the preceding three months. The averaging effect of compounded SORA helps to smooth out day-to-day fluctuations in interest rates, providing for more stable interest payments. Apart from the three-month compounded SORA, some banks could offer other tenor settings such as the one-month compounded SORA.

Compared with SOR and SIBOR, SORA readings are more robust as they are underpinned by a deep and liquid overnight interbank funding market.

The SORA Conversion Package is one type of SORA-based loan which customers can choose from. The SORA Conversion Package has been designed to minimise the difference in interest payments at the point of conversion from SOR to SORA. The SORA Conversion Package, which is the same across all banks, is offered at no extra cost or lock-in period to the bank’s existing customers on SOR-based property loans.

The SORA Conversion Package is tied to the three-month Compounded SORA. An adjustment spread is included when converting from the SOR-based loan to the SORA Conversion Package to account for the term and credit risk present in SOR but not in SORA. The adjustment spread would be dependent on the month of conversion, and would remain fixed for the remaining tenor of the loan. 

It should be highlighted that if customers’ SOR-based retail loans are not switched out by Aug 31, 2022, it will be automatically converted to the SORA Conversion Package in October 2022 and the adjustment spread applied will be that published by ABS as at Sept 1, 2022. 

Aside from the SORA Conversion Package, customers can also consider other SORA-based loan packages if they prefer a SORA reference rate with a different compounded period or with a different approach to how the customer’s margin is determined. An illustration is provided below. 

When deciding between a new SORA-based loan and the SORA Conversion Package, customers should compare not just the interest rate but also pay attention to the terms and conditions. For instance, switching to a prevailing package with the same bank might come with a lock-in period. The penalties for early repayment of the loan may also differ, which will affect those who sell their homes or have the means to prepay a significant portion of their mortgage.

Option 2. Fixed-rate loans 

Many banks offer loans where the interest rate is fixed for the first two or three years. The rates in subsequent years will be benchmarked to SORA or another floating rate.

Fixed-rate loans typically carry a higher interest rate compared with variable rate mortgages because the rate is locked in during the first two or three years. As global interest rates are widely expected to rise, the difference between fixed and floating rates may be higher than in the past.

Customers with SOR-based loans will not incur charges should they decide to switch to a fixed rate loan with the same bank so long as the loan tenure remains the same. However, a lock-in period may apply.

After the initial two- to three-year period on fixed rates, customers who prefer the stability of fixed interest rates may be able to negotiate a new fixed rate package with their bank.

Option 3. Combination of fixed- and floating-rate loan

Some banks allow customers to opt for loans with a combination of fixed and floating rates to reduce the volatility in interest rates.

Assuming that 50 per cent of the loan is subject to a fixed rate while the other 50 per cent is benchmarked to SORA, a one percentage point increase in the three-month Compounded SORA will result in a lower 50-basis-point rise in the overall blended interest rates since half the loan payment is fixed.

The reverse, however, also applies, meaning customers on such hybrid loan packages will not benefit as much if interest rates fall in future.

Option 4. Bank-managed board rate loans

Bank-managed board rates (e.g. fixed deposit-pegged rate) are interest rates that banks determine internally as references to price various loans including mortgages. As board rates can increase and decrease over time, board rate loans are also a type of floating rate loans.

Loans that reference board rates are less transparent as these are internally managed by the bank, compared with loans tied to SORA since SORA is calculated and published daily by MAS using actual overnight funding transactions between banks.

Speak to your bank today 

Singapore customers have benefited from low and stable interest rates over the past decade, which meant they rarely saw much of a difference in monthly repayments whenever floating rate home loans were reset.

The interest rate environment has changed, so customers with loans referencing SOR should take the opportunity to speak to their banks and explore their options.

Mr Lawrence Loh, who heads the Consumer Products Subgroup within the SC-STS says: “Customers should compare not just the all-in rate, but also look at the terms. The best option for a person planning to sell his apartment in the near future may be different for someone who has no intention to change homes for the duration of the loan.”

Customers on SOR-based loans are strongly encouraged to speak with their banks by Aug 31, 2022, to find out the options available and pick one that best suits their needs. SOR-based loans that continue to remain outstanding after Aug 31, 2022, will be automatically converted to a SORA reference by Oct 31, 2022.